How to: Rosenthal

You must be doing something right when you have financed brands for 86 years.

Rosenthal provides capital ranging from half a million to $40 million to clients through three core financing products:

1. Factoring
2. ABL and
3. PO Financing.

Clients span Apparel, Accessories, Food & Beverage, Beauty, Electronics, and Toys who sell through retailers as well as DTC.

This is not a sponsored post and I am receiving no compensation. I simply find finance products interesting and want to share what I have learned.

Factoring (loom video)

Rosenthal offers non-recourse factoring. This means they are buying the invoice from you and taking the credit risk on their end. Keep in mind that non-recourse just applies to the financial health or bankruptcy of the retailer. If the retailer assesses chargebacks (i.e. they don’t pay the full amount of the invoice), that is still on you.

Here’s how it works in practice. Rosenthal looks at your retail accounts over the previous 12 to 24 months and determines the typical dilution. Dilution is the difference between what you get paid on your invoices and what you invoiced. A rule of thumb is that your advance rate will be 1 minus 2X dilution. For example, if a retailer typically pays you 90% of the invoice, then you have 10% dilution. And your advance rate would 80%.

Your mix of retailers is key here. Are you selling a lot to TJ Maxx? You will get higher advance rates. If you are selling mostly through Kihei or a distributor taking large payment deductions, you will get lower advance rates.

Your fees are going to be:

• a Commission Fee which varies between 25 bps (0.25%) to 100 bps (1.0%) which is applied to the gross invoice amount factored.
• an Interest Fee (think Prime + 2% but will obviously vary with underwriting and credit markets) which is determined daily (using a 360 day year) and applied once the advance is made.

Once Rosenthal collects on the invoice from the retailer, they remit the remaining balance, less all their fees.

If you only sell to high credit retailers, you may feel confident in payment and not be worried about credit risk. But if you are selling to a mix of retailers with varying credit profiles and especially if you are selling to small retailers or regional chains, this is a terrific feature.

This type of factoring opens up an interesting product offering where companies can pay Rosenthal to collect on their behalf. The company pays Rosenthal the Commission Fee, but does not borrow against the receivables which has the effect of transferring the credit risk from the company to Rosenthal. Once they collect on the invoice, they remit the full amount less their Commission Fee back to the brand.

If you were selling to just CostCo you wouldn’t do this because your credit risk is low and you can monitor it yourself. But if you are selling to a wide mix of national retailers, regional retailers and mom & pops, your credit exposure is significantly higher and much harder to monitor. A billion+ dollar apparel company uses Rosenthal in this way (loom video).

Rosenthal requires all your receivables. This is not a product where you sell receivables individually. On their side, they are trying to guard against over advancing and to mitigate risk.

ABL

Asset Based Lending in retail and brands is lending against inventory. If the borrower does not pay, the lender has the right to seize the inventory to be made whole. Benefits to ABL’s are:

1. Lower interest rates because the loan is against hard assets.
2. Knowable and predictable credit availability. Because you are borrowing against the value of your inventory, you can predict how your inventory will increase or decrease over time. This is useful for companies who have a steady state of growth and known sales velocity on their product mix

Challenges of ABL’s are:

1. If companies are growing quickly or experiencing wide swings in their inventory, it can be hard to predict the future credit available
2. For companies introducing lots of new products or products where the sales velocities are unknown or hard to predict, the lender will have a harder time assigning an advance rate.
3. Inventory reporting can be a challenge. The lender requires frequent updates on inventory levels so companies need good systems to not only track current inventory levels but also sales velocities. Third party inventory audits will be required and the borrower bears these costs. The frequency of these audits and reports will increase if the borrower is doing worse. So, if a borrower’s business slows or worsens, the costs of reporting will increase.
4. ABL’s require that the lender be able to take control of the inventory quickly. Using 3PL’s or if the 3PL is offshore (e.g. in Mexico) can be challenging for some ABL lenders. But Rosenthal has experience with this and in the case of impairment often seeks to keep paying the 3PL to help with orderly liquidation as opposed to seizing the inventory.
5. Legal costs will typically be a little higher than unsecured loans because the secured interest just requires higher degrees of specificity. The borrower pays the legal fees of both sides.

Fees for Rosenthal’s ABL product are:

1. A Facility Fee which is around 1% - 2% of the maximum credit size. For example, if their underwriting comes back with a maximum credit facility of $10 million, the Facility Fee would be $100,000 to $200,000. This is applied to your balance immediately. The larger the facility, the more competitive this fee will be.
2. An Interest Fee which would be around Prime + 2% and is highly dependent on underwriting. This is applied daily (360 day year) to your balance. Interest accrues daily and then is paid on the first day of the month.
3. An Admin Fee which is typically around $1,000 per month

For many clients, Rosenthal will combine the Factoring product with the ABL and what they are doing here is effectively expanding their security to include not just the receivable but also the inventory. This increased borrowing base enables them to increase credit limits and potentially decrease interest rates.

For some ABL clients (often food & beverage and beauty clients), Rosenthal will also lend against the receivables, but not offer the credit mitigation and collection services.

PO Finance

This product is for when you have a Purchase Order from a large retailer (e.g. CostCo) or regional chains where Rosenthal is comfortable with the credit risk. It is not for PO’s you place with your suppliers. As long as you have gross margins of 25% or greater, Rosenthal will advance 100% of the COGS related to the PO. There are some admin fees for this, but the main fee is between 1% and 2% per 30 days.

PO Finance pairs perfectly with their factoring. Here’s how it works:

1. You receive a PO from a retailer that meets Rosenthal’s criteria
2. They advance 100% of the COGS of that PO
3. Interest accrues daily and is paid on the first day of the month
4. When you ship the product and an invoice is created, Rosenthal takes out what is owed under the PO financing (the advance plus the accrued interest plus other fees) from their factoring advance. Your PO finance turns into factoring. You can typically draw down the remaining gross margin after paying back the PO advance and fees.

To see how these products work with real cashflows, I model the products here.

To connect with Rosenthal, reach out to Andrew Barone.

I am an inflection CFO which means I help brand leaders maximize wealth creation by upleveling their finance function through 3 to 6 month engagements. If that sounds helpful or you have questions, reach out.